Capital allowances are tax deductions that can be claimed on certain types of capital expenditure. Capital allowances reduce taxable profits, reducing the amount of tax a business needs to pay.
In the United Kingdom capital allowances can take the form of an annual “writing down allowance” which writes off the capital expenditure over the life of the asset. However, of more value to companies and businesses are the Annual Investment Allowance and other first year allowances. These allow the cost of qualifying capital expenditure to be deducted from taxable profits in the year that it is incurred.
First Year Allowances include:
- Annual Investment Allowance (AIA); permits businesses to deduct the full purchase value of qualifying assets from their profits before tax. The AIA limit is currently set at £1 million per year.
- The Annual Investment Allowance is available for limited companies, Limited Liability Partnerships, ordinary Partnerships and Sole Traders.
- Super-deduction; permits companies to deduct 130% of the costs of assets from their profits before tax. Assets must be from the “Main Rate Pool”, such as equipment, machinery It cannot be claimed on second-hand assets or leased assets
- The Super-deduction is only available for expenditure up to 31 March 2023.
- The Super-deduction can only be claimed by companies subject to Corporation Tax. It cannot be claimed by partnerships and other unincorporated businesses.
- Special Rate Allowance; permits companies to deduct 50% of the costs of assets from their profits before tax. Assets must be from the “Special Rate Pool” such as items deemed to have a longer useful life or a low residual value.
- The Special Rate Allowance which was due to expire on 31March 2023, will continue for a further 3 years to 31 March 2026.
- This Special Rate allowance can only be claimed by companies subject to Corporation Tax.
- Full Expensing; a First Year Allowance that replaces the “Super-deduction” as of 1 April 2023. Permitting companies to deduct 100% of the costs of assets from their profits before tax. Assets that qualify for Full Expensing must be from the “Main Rate Pool”.
- Full Expensing can only be claimed by companies subject to Corporation Tax.
- Enhanced Capital Allowances (ECA); are available for energy-saving and environmentally friendly technologies that are on the government’s Energy Technology List. They provide a 100% deduction for the cost of qualifying assets in the first year of purchase.
- Enhanced Capital Allowances can only be claimed by companies subject to Corporation Tax.
Other types of Capital Allowances:
- Writing Down Allowance (WDA); provides a tax deduction for the depreciation of capital assets over time. The percentage of the WDA depends on the type of asset and ranges from 6% to 18%.
- Where other capital allowances do not apply, or where limits have already been reached, businesses are able to write down the costs or remaining costs of assets at the applied rate of 6% or 18% depending on whether the asset is in the special or main rate pool.
- WDAs apply to all types of businesses such as, Limited Companies, Limited Liability Partnerships, ordinary Partnerships and Sole Traders.
- Research and Development Allowances (RDA); provides a tax deduction for capital expenditure on certain types of R&D projects, such as scientific research or the development of new products.
- There are separate schemes available depending on the size of the company.
- RDAs are only applicable to companies subject to Corporation Tax.
- Flat Rate Pooling; is a simplified method of calculating capital allowances for small businesses. Instead of calculating the allowances for each asset, businesses can group their assets into a single pool and claim a fixed percentage allowance each year.
- Flat Rate Pooling applies to all types of businesses such as, Limited Companies, Limited Liability Partnerships, ordinary Partnerships and Sole Traders.
- Structures and Buildings Allowance; may be available if you build, buy or lease a property that was signed off on or after 29 October 2018 and is used for a qualifying activity. Allowing the businesses to write down 3% (2% between October 2018 and April 2020) of the costs for a period of up to 33 and one third years
- Structures and Buildings allowance applies to all types of businesses such as, Limited Companies, Limited Liability Partnerships, ordinary Partnerships and Sole Traders.
Why are capital allowances beneficial to businesses?
Overall, capital allowances, and particularly first year allowances, provide an important tax incentive for companies and other businesses to invest, which can help to drive there economic growth and competitiveness.
It is worth noting that the availability and amount of capital allowances often change so it is advisable to consult a specialist.
For detailed advice and guidance on Capital Allowances, please contact David Gillies at Friend Partnership.
You can call David on 0121 633 2007 or contact him by email at firstname.lastname@example.org
Friend Partnership is a forward-thinking firm of Chartered Accountants, Business Advisers, Corporate Finance and Tax Specialists, based In The UK